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J&J New CEO’s Takeover Watch Spans Edwards to St. Jude: Real M&A

Johnson & Johnson Chief Executive Officer Alex Gorsky
Alex Gorsky, chief executive officer of Johnson & Johnson. Photographer: David Maxwell/Bloomberg

Johnson & Johnson’s pursuit of growth through acquisitions could put companies from Edwards Lifesciences Corp. to St. Jude Medical Inc. on its wish list.

A year after J&J announced the biggest acquisition in its 126-year history, newly appointed Chief Executive Officer Alex Gorsky is now looking to takeovers to bolster the medical-device unit with products such as heart valves, according to an interview last week with Bloomberg News. J&J’s own cardiovascular sales have fallen for five straight years, the only business in its medical device division to shrink.

Gorsky, who started as CEO last week after overseeing J&J’s medical devices, takes over a company beset by more than 50 recalls on products from Children’s Tylenol to artificial hips since 2010. The world’s second-biggest seller of health-care products could command half the global market for heart valves by buying Edwards, which analysts say will boost earnings more than any cardiovascular device maker in the next three years, data compiled by Bloomberg show. With St. Jude, J&J would get a company with the industry’s highest operating margins.

“If J&J is interested in remaining relevant in cardiology, it’s important for them to create another beachhead,” Jeff McCormack, a senior equity analyst for Fairport, New York-based Manning & Napier Inc., which oversees about $40 billion, said in a telephone interview. In the cardiology market, “size is going to matter. So it might be a good time for a company like J&J to begin to identify who they envision to be winners,” he said.

He said Edwards and St. Jude are among the cardiovascular device makers that make the most sense for J&J to acquire.

Cardiovascular Commitment

Today, Edwards rose 2.2 percent to $84.78 a share, the biggest advance in the 17-stock Bloomberg Industries Global Interventional Cardiology Index.

Shares of St. Jude gained 0.9 percent to $39.05.

“We do not comment on rumors or speculation,” Michael A. Mussallem, CEO of Irvine, California-based Edwards, said in an e-mail when asked whether the company had been approached by J&J or would be open to a sale. “We run Edwards for the long-term and we are very excited about what the future holds.”

Amy Jo Meyer, a spokeswoman for St. Paul, Minnesota-based St. Jude, also declined to comment on whether it has been approached by J&J or would consider selling itself.

Bill Price, a spokesman for New Brunswick, New Jersey-based J&J, declined to comment on J&J’s acquisition plans or whether it is interested in either Edwards or St. Jude.

“When there are large opportunities that we think can give us more strategic advantage we will obviously take a look,” Gorsky said in a telephone interview on April 25. “We remain committed to cardiovascular,” he said, even after sales decreased 44 percent since 2006.

Quality Control

His comments came a year after J&J announced its takeover of Synthes Inc., the world’s biggest maker of devices to treat bone fractures and trauma, for $21.3 billion in cash and stock.

Accounting for the cash and debt Synthes holds, the transaction will be the largest for a medical-products company and exceed J&J’s $16.6 billion deal for Pfizer Inc.’s consumer health-care business in 2006, data compiled by Bloomberg show. The Synthes deal is expected to close by June, the data show.

Gorsky is focused on acquisitions as product recalls and quality control issues caused J&J’s shares to underperform its competitors. Shares of J&J rose 24 percent in the past three years through yesterday, half the average gain for health-care companies in the Standard & Poor’s 500 Index, the benchmark gauge for American common equity.

J&J has recalled millions of packets of Tylenol, Motrin, Benadryl and other over-the-counter medicines due to foul odors, adulterated ingredients and bad labeling, which undermined its reputation for quality and safety.

Artificial Valves

The $179 billion health-care company was knocked from one of the top two spots in Harris Interactive’s annual consumer poll of corporate images this year for the first time in 13 years, falling to seventh.

J&J also faces more than 6,000 lawsuits from patients who received faulty artificial hips that were recalled in 2010, as well as more than 550 lawsuits by women who blame vaginal mesh implants made by J&J’s Ethicon unit for internal injuries.

J&J, which last year exited the market for the drug-coated heart stents that it pioneered after competition pushed down prices, could now look to acquire Edwards to expand its share of faster-growing and more profitable cardiovascular devices to stem its revenue decline, according to Joanne Wuensch, a New York-based analyst for BMO Capital Markets.

Edwards, the largest maker of artificial heart valves worldwide, has increased sales for 10 straight years and controlled about 47 percent of the $2.2 billion market for the devices last year, data compiled by Bloomberg show.

Less Invasive

Analysts project the company’s earnings before interest, taxes, depreciation and amortization will climb 66 percent to $812 million by 2015 from an estimated $490 million this year, the data show. That’s more than any maker of cardiovascular devices with at least $1 billion in revenue in the past 12 months and three times faster than J&J itself.

Edwards, valued at $9.5 billion, won approval from the U.S. Food and Drug Administration in November for its Sapien transcatheter heart valve, the first less-invasive heart valve to be marketed in the U.S. to treat patients who are too sick for chest-opening surgery. Edwards said the device will bring in as much as $600 million in sales this year, almost a third of its revenue that analysts project will approach $2 billion.

J&J’s cardiovascular unit had $2.3 billion in sales last year, according to data compiled by Bloomberg.

Relative Value

“J&J has been quite public for some time about wanting to get into heart valves, particularly transcatheter heart valves,” said BMO’s Wuensch. “To get there, they could buy Edwards. Edwards has the only transcatheter heart valve on the U.S. market at this stage. It’s one of the more interesting medical technologies around right now.”

St. Jude, which makes defibrillators, pacemakers and heart valves, could also attract J&J by giving it a broader range of heart-related products, according to Jay Singhania, a money manager at Dallas-based Westwood Holdings Group Inc., which oversees $13.9 billion and owns shares of J&J and St. Jude.

Founded in 1976, St. Jude earned 26 cents in operating income for every dollar of its $5.6 billion in sales in the last 12 months, the highest operating margin among cardiovascular device makers with Ebitda growth that exceeds J&J’s and more than double the industry median, the data show.

St. Jude, which has about 17 percent of the heart valve market, also traded at 11.3 times earnings yesterday, the lowest among comparable companies in either the U.S. or Europe.

Moving the Needle

“J&J’s notably absent from heart valves and they got out of the stent business, so they definitely have a hole there,” Westwood’s Singhania said in a telephone interview. “St. Jude would give them some optionality on some of these needle-moving pipeline opportunities. St. Jude does look cheap.”

St. Jude, with a market value of $12.4 billion, has had to grapple with its own safety issues in some of its older products, which could deter J&J, according to Glenn Novarro, a New York-based analyst for RBC Capital Markets.

The journal HeartRhythm released a study in March showing St. Jude’s Riata wires, used to connect life-saving defibrillators to the heart, may fatally short-circuit and could have led to 22 deaths. They were recalled last year. The company will also stop selling the QuickSite and QuickFlex left-ventricular wires after 39 reports of the wires protruding from their insulation, the company said April 4.

While RBC Capital’s Novarro doesn’t anticipate any issues occurring with St. Jude’s newer Durata-brand wires, it could take at least a year before J&J considers a cardiovascular device deal because of the time it needs to integrate Synthes.

‘The Right Horses’

Gorsky should also spend J&J’s cash to bolster quality control rather than relying on acquisitions to lift its shares, according to Matt McCormick, who helps oversee $6.2 billion at Bahl & Gaynor Inc. in Cincinnati.

Shares of J&J advanced less than 5 percent during the 10-year tenure of Gorsky’s predecessor, William C. Weldon, according to data compiled by Bloomberg.

“J&J needs to fix their current ‘house’ before they put on an addition,” McCormick said in an e-mail. “An acquisition would not fix the stock.”

For Thomas Gunderson, an analyst at Piper Jaffray Cos., the chance for J&J to regain its position in the cardiovascular device industry justifies the risk of doing another big deal.

“My view would be, ‘Go big or go home,’” he said. “Cardio is a growth area and J&J has done well in the past there. They just need the right horses to ride.”

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